Supreme Court Rules to Close Online Sales Tax Loophole

On June 21, 2018, the U.S. Supreme Court ruled that states can impose sales tax on internet retailers, even if the retailer has no physical presence in that state. The court’s decision in South Dakota v. Wayfair overturns a 1992 Supreme Court precedent set by Quill Corp. v. North Dakota, which only allowed states to compel online retailers to collect sales tax if they maintained a physical presence in the state. Justice Anthony Kennedy, in his majority opinion, reasoned that modern e-commerce no longer aligns with the requirements of the overturned decision.

Though the Wayfair decision was a 5-4 split, the Supreme Court Justices did all agree that the Quill decision was wrong. The four dissenting Justices on the Wayfair case simply thought that the problem should be fixed through Congress rather than through the courts. And while the Supreme Court did decide that South Dakota’s tax law did not unduly burden interstate commerce, it was indicated that more complex or further reaching state tax laws might.

While e-commerce giants, such as Amazon and Wayfair, saw their stocks tumble in the wake of the Supreme Court decision, both brick-and-mortar businesses and many states consider the outcome a victory. Offline retailers have long decried their disadvantage at having to charge sales taxes when their online competitors often did not have to do so. Meanwhile, many states—particularly those that lack their own laws taxing internet sales—have complained about missing out on billions of dollars in annual revenue as a result of the online sales tax loophole.

In response to the Wayfair decision, many states will likely be looking to update existing or enact new e-commerce tax laws. Congress, too, is expected to address the issue, as attention turns back to a number of stalled e-commerce bills, including the Remote Transactions Parity Act/Marketplace Fairness Act and a sales tax proposal from Rep. Bob Goodlatte (R-VA). New legislation will likely include provisions to simplify, at least for online retailers, the complex state and local tax landscape.

Mixed opinions exist as to the impact of the Wayfair decision. Supporters laud it as a strike back against powerful online retailers. While the Quill decision was instrumental in the establishment of e-commerce, today’s environment is much different, and internet retailers no longer suffer the same disadvantage that they did in 1992. However, most large online retailers already collect sales taxes, as they have a large physical presence in most, if not all, states. Therefore, opponents of the decision argue that it will impact small retailers much more than big ones.